In early June, the IRS announced an amnesty program extending through Aug. 31, 2011 for taxpayers with offshore accounts. If you voluntarily disclose your foreign account holdings and the interest you have earned on it over the years, it will not throw you in jail. However, you will be required to pay taxes on the earnings as well as penalties and interest. If you dont take advantage of this program, you come under threat of criminal prosecution.
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In 2009, the IRS extended a voluntary disclosure program for offshore account holders, which was highly successful. The new amnesty program is similar, but the penalties are much more substantial--but do not include jail time.
A little background: U.S. citizens are taxed on world-wide income. Paying taxes in the country where the money was earned does not get you off the hook, although you may benefit from the foreign tax credit. Leaving the earnings in the account doesnt matter. Whether you took a check for the interest earned or not, you must declare what was earned that year. Age is also not a factor: If your child is 2 years old and Auntie McKenzie in Ireland set up an interest-bearing account there, your toddler may owe taxes on the income from that account.
The IRS promises fairness to the holders of accounts with minimal assets and earnings (such as the one set up by Auntie McKenzie). I assume this means it will likely abate some of the penalties.
The days of the numbered Swiss Bank account are over. Years ago banks in foreign countries began spilling their guts to the IRS. And the IRS has been landing on all fours on foreign account holders who have not declared earnings from those accounts. Were talking substantial penalties as well as criminal prosecution.
There are 11 different penalties that may be exacted on those who disclose this information to the IRS:
--A penalty for failing to file the Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an FBAR) to report your direct or indirect financial interest in all foreign accounts exceeding $10,000 at any time during the year. Penalty can be the greater of $100,000 or 50% of the total balance of the foreign account per violation.
--A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Penalty is 35% of the gross reportable amount, except for returns reporting gifts, which carries a penalty of 5% of the gift per month up to a maximum penalty of 25% of the gift.
--A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts. The penalty is 5% of the gross value of trust assets determined to be owned by the United States person.
--A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information. The penalty for failing to file is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
--A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25% foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the U.S. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
--A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information. The penalty is 10% of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
--A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and 10% of the value of any transferred property that is not reported, subject to a $100,000 limit.
--Fraud penalties. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75% of the unpaid tax.
--A penalty for failing to file a tax return. Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5% of the balance due, plus an additional 5% for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25%.
--A penalty for failing to pay the amount of tax shown on the return. If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of 0.5% of the amount of tax shown on the return, plus an additional 0.5%for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25%.
--An accuracy-related penalty on underpayments. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20% or 40% penalty.
Who says the rich dont pay? Looking at the above, it appears they will likely have to write a check to the IRS for at least the balance of any offshore account&.maybe more!
And if you wait for the IRS to hunt you down, you will face prosecution. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know, available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.